What are Mutual Fund FMP? Are they better than FD?

Fixed maturity plan is a close-ended debt fund, offered by mutual funds, which invest in debt and money market instruments.

FMPs are invested in the instruments of same maturity as fixed in maturity of plan.

The return in FMP are only indicative or expected but not ‘guaranteed', unlike a bank FD.

Finer points of FMPs

Tenure of FMPs vary from one-month to 3-years. As they are closed-ended, it means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment.

Minimum investment is usually Rs 5000, so as to facilitate retail participation.

The plan usually offers two options - growth and dividend option.

Where do they invest?

FMPs usually invest in certificate of deposits (CDs), commercial papers (CPs), money market instruments, corporate bonds, Government bonds. However, FMPs invest in high quality instruments, which are rated by at least one credit rating agency.

How FMPs fare, when compared to Bank FDs?

FMPs are managed by mutual fund houses, while FDs are managed by banks. The other vital difference is returns.

If you invest in bank fixed deposit, the interest rate is pre-determined and locked, so you know how much interest you would get on maturity of the deposit.

In case of FMP, interest rates are indicated by mutual funds as they have a pretty good idea of the expected rate of return. FMPS tend to be a little more risky when compared to FDs.

FMPs are tax efficient

FMP are highly tax efficient and a good investment options, especially for those who fall in the highest tax bracket.

Dividend earned on FMP is tax-free in the hands of an individual investor.

In case of longer FMPs, more than a year, if you choose to take all your gains as capital appreciation, the taxation is 10%, with indexation benefit or 20% with In case of indexation.

In case of investments for less than a year duration, individual investors will be taxed at 12.5% of the returns and corporates will get taxed at 20%.

However, an individual can avail tax benefit if he/she opts for receiving gains in the form of dividends.

*Indexation is a technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after inflation.

Quick look at difference between FMP and FD

FD

FMP

Tenure

7 days-5 years

1 month-3 years

Tax

Income on returns are taxble

No tax in case you opt for dividend payout

Managed

Mutual Fund houses

Banks

Returns

Fixed returns

Returns are not assured and can be volatile

Indexation benefit

NA

Indexation benefit where there is no dividend payout option

Investment

They invest in bank debt instruments

They invest in government securities, corporate bonds, money market instruments

Conclusion

In a dynamic investment environment, there seems to be little reason why individuals should not invest in FMP, as they are more tax efficient than FD.

They are the better investment option to park your money for short term.

However, they don't come with guaranteed returns. Investors need to discern and consider their risk pro­file and invest­ment objec­tive among other fac­tors before deciding.